Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

When a fund sponsor or issuer contemplates raising capital under prospectus exemptions in Canada, particularly in Ontario, the immediate question becomes: must you engage a registered exempt market dealer (EMD) or can you raise the capital directly? The short answer is it depends. The regulatory regime under Securities Act (Ontario), s. 25, National Instrument 31103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’ (NI 31-103) and related jurisprudence require dealer registration (or use of a third-party registered dealer) where the issuer or its agents are “in the business of trading” in securities. If the issuer’s capital raise activities are limited, infrequent, and not involving active solicitation or compensation, direct raising may be permissible. But where there is repeated solicitation, marketing, third-party intermediaries, or broader investor canvassing, regulators commonly determine dealer registration is required. The sponsor must therefore undertake a registration analysis, structure investor onboarding, marketing and closing processes accordingly, and decide whether to engage an EMD or manage directly with strong controls.

Regulatory Framework & Sources of Law

The key regulatory framework is Securities Act (Ontario), s. 25, as elaborated on in NI 31-103 which governs the registration categories for dealers, advisers and investment fund managers in Canada. Under NI 31-103, section 7.1 sets out dealer categories including the Exempt Market Dealer category. The relevant question is whether the issuer or its associates are carrying on the business of dealing in securities, which triggers registration unless an exemption applies. 

In addition, the regime for prospectus exemptions is governed by National Instrument 45106 – Prospectus Exemptions (NI 45-106). That instrument permits distributions without a prospectus if certain conditions are met, but it does not primarily address registration of the issuer or intermediaries, it simply defines exemptions for the offering. The relationship between NI 45-106 and NI 31-103 is important. Even if the offering itself relies on an exemption, the act of dealing may still bring registration obligations. The regulatory rationale is investor protection. Where capital raising activity takes on business-like dealer characteristics, including repeated offerings, active solicitation, use of third-party intermediaries, or transaction-based compensation, regulators may determine that the issuer or its agents are “in the business” of trading in securities and subject to dealer registration and conduct requirements.

Definitions & Thresholds

The concept of being a “dealer” in a “security” under Securities Act (Ontario), s. 1(1) includes trading, offering to trade, or facilitating the sale of securities. A “dealer” is someone who trades in securities as part of a business as principal or agent. Under NI 31-103, registration categories apply to anyone “in the business of trading in securities.” The threshold is not defined by a single number but by qualitative factors such as repetition of trades, marketing or solicitation, receipt of compensation for those activities, reliance on intermediaries, offers to investors generally, and so forth. The category of Exempt Market Dealer (EMD) is defined in NI 31-103 (s. 7.1(2)(d)), enabling firms to deal in securities distributed under prospectus exemptions, subject to the instrument’s requirements. A sponsor therefore must ask if they are raising capital for one project only, to a known limited group, with no third-party compensation, and minimal solicitation? If so, direct raising may be feasible. If the sponsor instead aims for multiple closings, broad marketing, non-accredited investors, referrals, or issuer-paid commissions, dealer registration (or use of a third-party dealer) is likely required.

Application in Practice

In practice, the question of whether you need an EMD or can raise directly unfolds in three steps: registration analysis, distribution structuring, and compliance controls.

Step 1 - Registration Analysis: The sponsor should conduct and document a structured assessment of its proposed capital raising activities. This includes identifying the anticipated number and frequency of offerings, the intended marketing channels and materials, the role of any intermediaries, the nature of any compensation arrangements, and the target investor base and applicable exemptions. The objective is to determine, on the facts, whether the activities could reasonably be characterized as being “in the business” of trading in securities. Where the analysis supports that conclusion, the sponsor should plan to register as a dealer or engage a registered EMD. The analysis should be recorded contemporaneously and revisited as the offering evolves, as failure to do so increases exposure to unregistered dealing findings and regulatory intervention.

Step 2 - Distribution Structuring: If direct raising is chosen, the issuer must structure the process to avoid the dealer trigger or document clearly why an intermediary is not needed. This means limiting solicitation to existing relationships, avoiding third-party compensated promoters, restricting offering to a small group of close contacts and, where available, relying on the ‘friends, family and business associates’ exemption under National Instrument 45-106, s. 2.5 (which is not available in Ontario where the issuer meets the definition of “investment fund”), and documenting investor eligibility carefully. If an EMD is used, the issuer negotiates with the EMD on roles including investor onboarding, KYC/AML, subscription management, fees, Form 45-106F1 filings, investor communications, and jurisdictional compliance.

Step 3 - Compliance Controls: Regardless of route, the issuer must maintain strong books and records, investor eligibility verification, accurate subscription documentation, proper use of exemptions under NI 45-106, and filing of required reports of exempt distributions (Form 45-106F1). If raising directly without a dealer, the issuer must still monitor marketing texts, investor communications, closing logistics, and investor onboarding rigorously. In many cases, issuers engage legal counsel or external advisors to validate that the capital raise remains within direct-raise boundaries rather than dealer thresholds.

Grey Areas & Regulator Focus

Several grey-zone issues are prevalent and subject to regulatory focus. First is solicitation and compensation. When a non-registered party is used to pitch investors (introductions, webinars, conferences) and is paid, regulators may treat the issuer as providing “dealer-type” services, triggering the registration requirement. Factors such as “solicitation,” “repetition,” and “compensation” are central.  
Second is multiple closings and rolling offerings. If the issuer plans a series of closings over months or years, many regulators consider this ongoing fundraising as “in the business” of dealing, even if the investor base is small. 

Third is use of third-party marketing platforms or “finders”. Even an informal introduction network can trigger dealer registration if compensation or material solicitation exists. 

Fourth is geographic reach and cross-jurisdictional distribution. Engaging investors in multiple provinces increases exposure and triggers more scrutiny, especially about dealer registration across jurisdictions. 

Fifth is advisor role confusion. If the issuer’s employees or affiliates attend investor meetings, provide suitability advice, negotiate terms or accept commissions, the sponsor may inadvertently act as a dealer.

Regulators, including the Ontario Securities Commission (OSC) and other provincial authorities, regularly focus on unregistered dealing risk in exempt market distributions. A common finding is issuer-conduct raising capital without appropriate registration or engaging an EMD when required. Sponsors should view this not as theoretical but as real enforcement exposure.

Interactions with Adjacent Regimes

The decision whether to engage an EMD or raise directly does not exist in a vacuum, it interacts with other regimes. Under NI 45-106, the exemption used for distribution must align with investor eligibility and subscription procedures. If the issuer uses a broad offering without registered dealer involvement, the risk of using an invalid exemption increases. 

Books and records requirements under NI 31-103 apply to registrants, but analogous record-keeping is effectively necessary for non-registrant issuers. In practice, regulators will review internal records to assess whether the issuer’s capital raising activities constitute unregistered dealing.

Tax structuring (flow-through entities, investor residency, withholding) and fund structuring (LPs, corporate vehicles) influence how the capital raise is shaped and whether the issuer appears to be “in the business” of trading. Real estate fund sponsors, for example, must ensure that asset acquisition, investor onboarding, subscription mechanics, and distribution policy align such that capital raising does not tip into dealer territory. 

Additionally, cross-provincial distribution requires prospective filings (Form 45-106F1 in each jurisdiction), and marketing materials must account for each province’s rules. Failing to coordinate these regimes increases regulatory risk.

Illustrative Scenarios

Scenario 1: A real-estate sponsor in Ontario decides to raise $5M from five family-office investors whom the sponsor has known for years. No finder’s fee is paid, no marketing beyond personal introduction is carried out, subscription documents are executed directly, and there is one closing only. The sponsor deems the raise direct and no EMD used. The raising is more likely to remain compliant and reduces registration risk because the criteria of solicitation, repetition, compensation are absent.

Scenario 2: The same sponsor plans to raise $50 M across multiple projects over two years, uses webinars and presentations to high-net-worth individuals (HNWIs) across Canada, engages a broker-introducer network paid on a success basis, and plans subsequent closings. The regulator sees repeated solicitation, compensation to intermediaries, broad investor outreach, and likely concludes the sponsor is “in the business” of trading. Therefore, an EMD should have been engaged or the sponsor should register as a dealer.

Scenario 3: A fund sponsor tries direct raising but uses referral agents who receive finders’ fees. The sponsor argues these agents are not “dealers” because they simply introduce leads. The regulator disagrees because the introduction was materially compensated and followed a pattern; hence dealing activity occurred without registration, leading to enforcement and requiring remedial steps. This scenario underscores the danger of assuming sourcing alone is safe.

Compliance Checklist

To reduce unregistered dealing risk and enforcement exposure:

• Conduct registration analysis; document investor base, marketing, closings, intermediaries, compensation, jurisdictions, eligibility
• If limited outreach, no compensation, single closing, small investor group, direct raise may be viable
• Use NI 45-106 exemption; ensure subscription docs, AML, Form 45-106F1 filings, aligned disclosure
• If dealer indicators arise (multiple closings, solicitation, fees), engage EMD or register
• If using EMD, document roles: fees, KYC, onboarding, filings, diligence
• Confirm EMD meets NI 31-103; monitor activity
• Maintain records, consistent communications, and documented marketing activity

What’s Changing

Relatively recent Ontario Securities Commission Tribunal decisions have clarified how the “in the business” test is applied in practice. In Re Go-To Developments Holdings Inc., the Tribunal emphasized that repeated capital raising, including across multiple projects, does not by itself establish that an issuer is in the business of trading. The analysis remains fact-specific and turns on whether the capital raising activity is sufficiently connected to an underlying operating business or instead reflects a standalone dealing function.

At the same time, regulatory focus continues to centre on solicitation and compensation. The use of finders, referral arrangements, and third-party marketing remains a primary trigger for dealer registration concerns, particularly where compensation is transaction-based or where there is a pattern of repeated introductions. Regulators are also scrutinizing modern marketing channels, including webinars, investor presentations, and online distribution, as evidence of active solicitation.

Oversight of investor eligibility under NI 45-106 and the integrity of exemption reliance remains consistent. In practice, regulators continue to examine subscription processes, investor qualification, and the documentation supporting exempt distributions as part of broader reviews of exempt market activity.

Sponsors should reassess their capital raising model periodically, with particular attention to how their solicitation methods, compensation structures, and offering cadence may affect the dealer registration analysis.

Conclusion & Next Steps

Deciding whether you need an EMD or can raise capital directly is a critical strategic and compliance decision for fund sponsors and issuers. While direct raising remains possible in narrow circumstances, many capital raises in the exempt market will likely require a registered dealer or use of a participating EMD. With a thoughtful approach, you reduce the risk of regulatory intervention, investor claims or remediation following capital raises.

Book a Consultation

If you are raising funds in the exempt market, or 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.