Do You Need an EMD or Can You Raise Capital Directly?

Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

A private investment fund, real estate sponsor or other issuer raising capital under a prospectus exemption must consider two separate securities-law questions. First, is a prospectus exemption available for the distribution? Second, do the capital-raising activities require dealer registration?

The availability of a prospectus exemption under National Instrument 45-106 Prospectus Exemptions (“NI 45-106”) does not itself answer the registration question. In Ontario, subsection 25(1) of the Securities Act (Ontario) generally requires registration where a person or company engages in, or holds itself out as engaging in, the business of trading in securities, unless an exemption from the registration requirement is available.

An issuer does not necessarily engage the dealer registration requirement merely because it distributes its own securities directly to investors. The registration analysis depends on whether its activities, considered in context, amount to being in the business of trading securities.

That determination requires a fact-specific analysis of the issuer’s business, its capital-raising activities and the manner in which the distribution is conducted.

The Two Separate Regulatory Questions

A common source of confusion in private placements is the distinction between the prospectus requirement and the dealer registration requirement.

NI 45-106 provides exemptions from the prospectus requirement. Depending on the circumstances, an issuer may distribute securities in reliance on exemptions such as the accredited investor exemption, the private issuer exemption, the family, friends and business associates exemption where available, or the offering memorandum exemption.

Those exemptions address whether securities may be distributed without a prospectus. They do not, by themselves, determine whether a person involved in selling those securities must be registered as a dealer.

The registration analysis arises separately under Ontario securities legislation and National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations (“NI 31-103”).

An issuer contemplating a private placement should therefore consider three questions:

1. What prospectus exemption permits the distribution?
2. Are the issuer or any persons acting on its behalf engaging in the business of trading in securities?
3. If dealer registration is required, is an exemption from registration available or should a registered dealer be engaged?

Keeping these questions separate is fundamental to structuring an exempt market financing.

The Dealer Registration Requirement

Subsection 25(1) of the Securities Act (Ontario) establishes the principal dealer registration requirement in Ontario.

The fact that an issuer sells its own securities does not automatically mean that the issuer is acting as a dealer requiring registration. Issuers necessarily engage in trades when they issue securities to investors. The relevant question is whether the issuer’s activities, viewed in context, amount to being in the business of trading securities.

This analysis is generally referred to as the “business trigger.”

The Companion Policy to NI 31-103 identifies a number of factors relevant to whether trading is conducted for a business purpose, including engaging in activities similar to those of a registrant, acting as an intermediary, repetition or continuity of the activity, receiving or expecting remuneration, and soliciting securities transactions. The factors are not exhaustive, and no single factor necessarily determines the analysis.

The issuer’s activities must therefore be considered as a whole and in the context of its underlying business.

Issuers Raising Capital for Their Own Business

The business-trigger analysis is particularly important for operating businesses, private investment funds and real estate sponsors that raise capital to finance their activities.

An issuer may conduct multiple financings without necessarily becoming a person whose business is trading securities. Frequency and repetition are relevant considerations, but they must be considered in the context of the issuer’s underlying business and the purpose and character of its financing activities.

The Ontario Capital Markets Tribunal’s decision in Go-To Developments Holdings Inc. (Re), 2025 ONCMT 8 provides an important example of this contextual analysis.

Furtado and GTDH operated a real estate development business through project-specific limited partnerships and raised substantial amounts of investor capital to finance those projects. OSC Staff alleged, among other matters, that Furtado and GTDH had engaged in the business of trading securities without registration.

The Tribunal concluded that Furtado and GTDH were acting primarily as real estate developers and were raising capital for their underlying real estate development businesses, rather than engaging in the business of trading securities. It therefore dismissed the allegation that they had contravened subsection 25(1) by engaging in the business of trading securities without registration.

The decision is significant because it confirms that repetition, regularity and continuity of capital raising do not, by themselves, determine whether the business trigger has been met. The analysis remains contextual and includes consideration of whether the securities activities constitute a securities-trading business or are undertaken to raise capital for an underlying business.

The decision should not be treated as establishing a general exemption from dealer registration for real estate developers, fund sponsors or other issuers. The existence of an underlying business is relevant to the analysis but is not determinative. The registration analysis remains dependent on the particular facts.

Factors Relevant to the Business Trigger

An issuer contemplating a direct raise should examine its actual capital-raising activities rather than attempt to satisfy a predetermined checklist.

Relevant considerations may include the following:

The issuer’s underlying business. Capital raising undertaken to finance an operating, development or investment business may present a different registration analysis from an enterprise whose activities principally consist of selling securities or facilitating securities transactions.

Activities similar to those of a registrant. Activities commonly associated with registered dealers may indicate that securities trading is being conducted as a business. The substance of the activities matters more than the terminology used to describe them.

Intermediation. Acting between buyers and sellers or facilitating securities transactions for others is an important dealer indicator. An issuer distributing its own securities presents a different factual context from a person selling securities on behalf of unrelated issuers.

Frequency and continuity. Repeated, regular or continuous trading activity may support a finding of business purpose. Frequency alone is not necessarily determinative, particularly where securities are issued to finance an underlying operating or investment business.

Remuneration. Commissions, success fees, transaction-based compensation or other remuneration associated with securities sales can be significant indicators of dealer activity.

Solicitation. The nature and extent of investor solicitation may be relevant, particularly where capital raising involves systematic investor outreach or persons whose functions are principally directed toward selling securities.

Organizational structure and personnel. Dedicated sales personnel, securities-focused infrastructure or personnel whose principal function is obtaining investors may affect the analysis.

These considerations should be assessed collectively. The existence or absence of any one factor should not ordinarily be treated as creating a safe harbour or determining the registration analysis.

Direct Capital Raising by an Issuer

Where an issuer’s activities do not engage the dealer registration requirement, it may be able to distribute its own securities without retaining an EMD, provided the distribution otherwise complies with applicable securities legislation.

Direct distribution does not eliminate the issuer’s obligations in connection with the private placement.

The issuer must still identify an available prospectus exemption, satisfy the conditions of that exemption, obtain required investor representations and risk acknowledgements, prepare appropriate subscription and offering documentation, comply with applicable disclosure requirements and make required exempt distribution filings.

The issuer should also maintain records supporting its reliance on the applicable exemption and the manner in which the distribution was conducted.

The registration analysis should be revisited if the fundraising model changes. A capital raise conducted principally by the issuer’s management may develop into a materially different distribution model if the issuer later introduces dedicated sales personnel, compensated finders, third-party marketers or other intermediaries.

When a Registered Dealer May Be Required or Appropriate

Where proposed activities engage the dealer registration requirement and no registration exemption is available, the distribution must be conducted consistently with the applicable registration requirements.

For many private placements, engaging a registered EMD may be an appropriate means of conducting the dealer activities associated with the distribution.

Paragraph 7.1(2)(d) of NI 31-103 establishes the EMD registration category and permits an EMD to conduct specified activities involving securities distributed under prospectus exemptions and certain other securities, subject to the restrictions and other requirements applicable to the category.

An EMD may also be commercially useful where engaging one is not necessarily required by the issuer’s own registration analysis. Depending on the engagement, an EMD may provide infrastructure and personnel for investor solicitation, KYC and KYP, suitability determinations, conflicts management, investor onboarding, subscription processing and other aspects of the distribution process.

The decision to engage an EMD can therefore involve both a legal registration analysis and a commercial decision concerning how the offering will be distributed.

Finders, Referral Sources and Other Intermediaries

The use of unregistered finders, referral sources, consultants and other intermediaries requires separate consideration.

An issuer’s ability to distribute its own securities without dealer registration does not mean that an unrelated person can conduct securities-selling activities on the issuer’s behalf without considering that person’s own registration obligations.

Particular attention should be given to arrangements involving:

• commissions, success fees or other transaction-based compensation;
• repeated introductions of prospective investors;
• active solicitation of investors;
• participation in investor presentations or substantive discussions concerning the investment;
• negotiation of investment terms;
• recommendations concerning the investment; or
• other activities extending materially beyond a limited introduction.

The registration analysis applies to the intermediary’s actual activities. Describing a person as a “finder,” “consultant,” “introducer” or “marketing agent” does not determine whether that person is engaging in activities requiring registration.

The issuer’s registration position and the registration position of an intermediary should therefore be considered separately.

Employees, Officers and Principals of the Issuer

The involvement of an issuer’s directors, officers, employees or principals also requires consideration.

Participation by management in a financing does not automatically mean those individuals are acting as dealers. Senior management of a private issuer will often communicate with prospective investors concerning the issuer, its business and a proposed financing.

The analysis can become more difficult where an individual’s role is substantially devoted to raising capital, the individual engages in systematic solicitation, compensation is tied to securities sales, or the individual’s activities otherwise resemble those ordinarily performed by a dealer.

An issuer should therefore consider both its own activities and the activities of the individuals participating in the capital raise.

Marketing and Solicitation

Marketing is relevant to the registration analysis, but the existence of marketing does not by itself determine whether dealer registration is required.

Investor presentations, webinars, websites, email campaigns, social media and other communications should be considered as part of the overall distribution model.

Relevant considerations include who conducts the marketing, how systematic the activity is, whether persons conducting it are compensated for securities sales, whether the activity forms part of an organized securities-selling function, and how the activity relates to the issuer’s underlying business.

Marketing also raises separate prospectus-exemption and disclosure considerations. A conclusion that particular marketing activity does not establish the business trigger does not mean that the communication is otherwise unrestricted under securities legislation.

Multiple Offerings and Rolling Closings

Multiple offerings or rolling closings should similarly be treated as part of the overall factual analysis rather than as a standalone test.

A fund or real estate sponsor may require capital at different stages of its business or for successive projects. Go-To Developments demonstrates that repeated capital raising in connection with an underlying real estate development business does not necessarily mean that the issuer has become engaged in the business of trading securities.

The analysis may be different where securities-selling activity becomes an independent or substantial business function, particularly when combined with dedicated sales operations, intermediation, transaction-based compensation or other dealer characteristics.

Issuers conducting continuous or recurring offerings should therefore periodically reassess the registration analysis as their business and distribution activities develop.

Prospectus Exemptions Remain a Separate Analysis

Whether an EMD is involved does not determine whether a prospectus exemption is available. For each distribution, the issuer must identify an available exemption under NI 45-106 or other applicable securities legislation and satisfy its conditions.

Engaging an EMD does not cure the absence of an available prospectus exemption. Conversely, establishing that a prospectus exemption is available does not establish that dealer registration is unnecessary.

Multi-Jurisdictional and Cross-Border Offerings

An issuer raising capital from investors in more than one province or territory must consider the securities laws applicable in each relevant jurisdiction.

NI 31-103 and NI 45-106 provide substantial national harmonization, but registration, prospectus exemption and filing requirements must still be considered in each jurisdiction in which a distribution occurs.

An EMD engaged for a multi-jurisdictional offering should be appropriately registered or otherwise permitted to conduct the contemplated activities in each relevant jurisdiction.

The issuer and dealer should also establish responsibility for determining investor eligibility, preparing and filing reports of exempt distribution, maintaining supporting records and paying applicable filing fees.

Foreign investors create a separate layer of analysis. Compliance with Canadian securities legislation does not determine whether solicitation or sales activity complies with U.S. or other foreign securities laws or dealer-registration requirements.

Conclusion

Whether an issuer needs an EMD cannot be determined solely by counting investors, closings or offerings, or by establishing that a prospectus exemption is available.

The registration question is whether the issuer or another person involved in the distribution is engaging in the business of trading securities. That determination requires consideration of the nature of the issuer’s business, its capital-raising activities, solicitation, intermediation, compensation, personnel and the overall distribution model.

Book a Consultation

If you are raising capital in the exempt market and require advice concerning dealer registration, the business trigger, prospectus exemptions or the use of an Exempt Market Dealer, contact us to schedule an initial consultation with Nick Wright.