Registration as an exempt market dealer (EMD) brings access to distribution of securities in Canada’s exempt market but also exposes firms to significant compliance risk, particularly when registration, ongoing obligations, roles and scope of activities are misunderstood. Common traps for EMDs include miscategorising business activities and inadvertently acting outside the EMD registration category, failing to properly meet client-asset/custody requirements, weak KYC, KYP and suitability processes, inadequate anti-money laundering (AML) / anti-terrorism financing (ATF) controls, and defective filing or capital-compliance calculations. Avoiding these pitfalls means building an effective compliance framework, aligning business activities with registered scope, and documenting key client and product processes.


EMDs are regulated under the applicable provincial Securities Act and National Instrument 31103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’ (“NI 31-103”), which delineates registration categories for dealers and sets ongoing standards of conduct (including KYC, suitability, books & records, capital and custody). NI 31-103 establishes the exempt market dealer category and prescribes its permitted activities and ongoing obligations. The regulatory rationale is investor protection in the exempt market, where disclosure is lighter than in public markets. This places a burden on EMD registrants to apply effective compliance frameworks.

A “dealer” under Securities Act (Ontario), s. 1(1) is a person or company engaging in or holding out as engaging in the business of trading in securities as principal or agent. Under NI 31-103, registration is required for dealer categories unless an exemption applies. The EMD category allows a registrant to deal in securities distributed under a prospectus exemption (i.e., under NI 45106 ‘Prospectus Exemptions’). 

This means that an EMD is generally limited to distributions under prospectus exemptions and should not engage in activities that constitute investment dealer functions in prospectus-qualified offerings absent appropriate registration or relief. Key thresholds for determining if one is “in the business” of trading are qualitative and include repeated or systematic trading, solicitation of investors, compensation for distribution activities, and broad investor outreach.

One pitfall occurs when a firm registers as an EMD but then engages in activities outside its category, such as engaging in trading activity involving securities outside the context of a prospectus-exempt distribution, or assuming a role that is functionally equivalent to underwriting or dealer activity in a prospectus-qualified offering. An EMD should clearly define permitted business lines, document the scope of activities, and if the firm intends to trade listed securities or act as underwriter in a prospectus offering, then ensure it has the appropriate registration category (investment dealer or equivalent).

Many EMDs fail to collect or document sufficient information for know-your-client (KYC) and know-your-product (KYP) processes and do not have policies addressing concentration risk (for example, excessive exposure to illiquid securities or a single issuer relative to the investor’s financial circumstances). These issues can be avoided by adopting comprehensive onboarding forms and processes, including risk-profiling, concentration limits, annual or trigger-based suitability reviews, and document the matching of product risk to investor profile in each case. Suitability must be assessed not only at onboarding but also on a transaction-by-transaction basis and when there is a material change in client information. In parallel, firms must ensure that anti-money laundering and anti-terrorist financing controls under applicable federal legislation are independently satisfied and appropriately documented.

EMDs must maintain excess working capital, generally not less than $50,000 (subject to risk-adjusted capital calculations), calculated in accordance with Form 31-103F1, and where they handle client assets or client funds, must comply with client asset and custody requirements under NI 31-103, including the use of designated trust accounts or qualified custodians where applicable. Failures here expose regulatory and insolvency risk. EMDs should maintain current capital calculations, subordination agreements if there is related-party debt, audit trails of client funds, regularly reconcile accounts and update custodial agreements.

EMDs participating in distributions must ensure each offering meets exemption criteria (e.g., under NI 45-106), that investor eligibility is verified, that Form 45-106F1 reports are filed where required, and that marketing materials align with offering documents and regulatory guidance. Deficiencies in filings or misuse of exemptions often trigger regulator review. These issues can be avoided by maintaining a calendar of filing deadlines, assigning responsibility for each form, ensure that marketing/advertising is reviewed by compliance/legal, require offering-document signoffs and track investor qualification documentation.

Given the nature of exempt-market structures, many EMDs engage with issuers, fund-sponsors or distributors with overlapping ownership or affiliate relationships. Disclosure of related and connected issuers and conflicts is required under NI 31-103. Under the Client Focused Reforms, registrants must identify and address material conflicts of interest in the best interest of the client, which may require avoidance, control, and in some cases disclosure. Failure to document side-letter terms, differential fees, or preferential units may lead to investor complaints or regulatory review. These issues can be avoided by implementing conflict-of-interest policies, maintaining records of all related-party transactions, furnishing investor conflict disclosure and obtaining investor acknowledgement early in onboarding. This includes conflicts arising from affiliated issuers, compensation structures, fee arrangements, and differential investor terms such as side letters.

Regulators continue to focus on more subtle issues:

• “Sole purpose” EMDs: firms that exist solely to distribute the securities of one issuer, with limited independence or product review, may raise concerns about independence and KYP.
• Multiple jurisdictions: EMDs operating across provincial boundaries must comply with each province’s rules, potentially increasing liability and filing complexity.
• Hybrid roles: firms acting as adviser, fund manager and EMD may blur registration categories; the distinction between “advising” and “dealing” may be tested.
• Illiquidity and product risk: given exempt-market products’ illiquid nature, regulators expect EMDs to have heightened policies for concentration risk, liquidity mismatch, and disclosure of redemption limitations.
• Continuous offering / rolling closings: If an EMD or its issuer repeatedly raises capital, continuous or rolling offerings increase regulatory scrutiny of KYP, suitability, disclosure consistency, exemption availability, and filing accuracy across multiple closings.
  
  

EMD registration and compliance intersect with the exempt-market distribution regime (NI 45-106), fund-structuring law (including for private funds, LPs, real estate funds), tax (with investor eligibility and reporting consequences), AML/ATF regimes (verification of source of funds), and data-privacy frameworks (investor data collected during onboarding and transactions). A failure in any of these adjacent regimes often surfaces in regulator reviews of EMDs, for example, missing or incomplete information regarding an investor’s financial circumstances, investment knowledge, liquidity needs, time horizon, or existing portfolio concentration may impair suitability determinations or investor eligibility verification; cybersecurity failures may undermine books & records compliance. A holistic compliance framework is required.

Scenario 1: A newly registered EMD in Ontario decides to offer units of a listed resource company alongside its exempt-market distributions. It treats it as a private placement but the regulator reviews and finds the EMD engaging in trading activity involving listed securities in a manner inconsistent with the EMD registration category and outside a valid prospectus-exempt distribution. This triggers a regulatory review for misregistration of activities, and the firm is required to limit trading or seek registration as an investment dealer.

Scenario 2: An EMD distributes multiple exempt offerings over 18 months. It collects subscription funds in its main account rather than a segregated account, fails to file Form 45-106F1 (despite having agreed with the issuer to do so), and its KYC forms do not capture investor leverage or holdings in other exempt investments. The provincial regulator opens a compliance file. The firm must remediate and upgrade its policies.

Scenario 3: An EMD is affiliated with a fund sponsor; the EMD receives placement fees from the issuer; however, the disclosure to investors does not clearly state the affiliate relationship, nor the fee arrangement or side‐letters with early investors. Investor complaints emerge about preferential treatment. The regulator finds deficiencies in conflict-of-interest controls, which may give rise to misrepresentation risk and potential investor claims.

• Confirm activities fit EMD license (prospectus-exempt distributions only)

• Policies: KYC, KYP, suitability, conflicts, custody, capital, marketing, filings
• Delineate UDP/CCO roles and escalation

• Standard forms (KYC, accreditation)
• Onboarding and subscription workflows
• Maintain audit trails

• Maintain excess working capital of at least $50,000
• Calculate using Form 31-103F1 and test regularly
• Ongoing monitoring and escalation

• Determine whether the firm holds client assets or only facilitates fund flows
• Use designated trust accounts where applicable
• Ensure qualified custodian arrangements where required
• Perform regular reconciliations and maintain audit trails

• Pre-clear materials
• Align with exemption relied upon
• Retain records

• Verify investor eligibility
• Track and ensure filing of Form 45-106F1
• Record investor jurisdictions

• Product due diligence
• Risk disclosure alignment
• Evidence suitability determinations

• Conflicts register and related-party log
• Disclose relevant affiliations, compensation, side letters

• Retention compliant with NI 31-103
• Ensure audit readiness

• Annual compliance training
• Supervisory oversight

• Reassess registration if activities expand

• Periodic internal reviews
• Track and remediate deficiencies
  
  

Regulatory scrutiny of exempt market dealers is increasing. The Canadian Securities Administrators have continued to prioritize investor protection in the exempt market, with particular emphasis on the integrity of registration categories and the limits of the EMD activity. Amendments to NI 31-103, particularly the Client Focused Reforms, together with CSA compliance guidance, have tightened the conduct framework for EMDs and reduced the scope for business models that blur the boundary between exempt market dealing and investment dealer activity, including in transactions involving securities of reporting issuers.

Current supervisory focus extends to digital onboarding controls, cybersecurity and investor data protection, enhanced conflicts and compensation disclosure, and more rigorous expectations for product governance, including KYP processes and oversight of illiquid or complex offerings. Regulators are also examining the adequacy of suitability determinations in the context of concentration risk and repeated distributions.

Registration as an EMD offers access to Canada’s exempt-market capital raising, but the obligations and regulatory exposure are significant. Common pitfalls such as scope misalignment, weak client and product due-diligence, custodial and capital deficiencies, filing and marketing lapses, and conflicts of interest, are real and frequently cited by regulators. Practical next steps are to review and revalidate the business model against the firm’s registration category, update policies and procedures, test key compliance processes, schedule internal audit and remediation, train staff, and monitor new regulatory developments.

If you are forming, or operating an Exempt Market Dealer, Investment Fund Manager or Portfolio Manager in Canada, contact us to schedule an initial consultation with Nick Wright.